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Prospecting in ‘frontier markets’

Kai Ryssdal Dec 3, 2007

Prospecting in ‘frontier markets’

Kai Ryssdal Dec 3, 2007


KAI RYSSDAL: Wall Street was down today. The main European exchanges lost ground, too. Same for the Shanghai Composite. But if you want to look a little bit farther afield for investment opportunities, the Ho Chi Minh Stock Index was up a percent and a half today. Vietnam’s one of the most promising of what have come to be called “frontier markets.” One way to think of them might be as emerging economies that haven’t really emerged yet. John Authers is the investment editor at the Financial Times. We’ve called him up for a little insight. Good to have you with us.

JOHN AUTHERS: Good to be here.

RYSSDAL: Is there a text book definition that we could sort of use as we think about these countries?

AUTHERS: Different people have very different definitions of the frontier, but the countries that tend to be on the list most often are the countries of the Arabian Peninsula, and many of those got ahead of themselves and had an extremely sharp crash last year, which is actually good news because it means that they’re now very much cheaper, having been more expensive before, and many of them have been traditionally pegged against the dollar and it’s difficult to see how long that will last. If they decide to let their currencies go free then they could very quickly get a lot bigger than they are now.

RYSSDAL: Let me run a couple of names by you and get your reaction. First of all, Vietnam. Is that in play here?

AUTHERS: Very, very much so. In many ways, Vietnam is now where Mexico was say 10 or 15 years ago, and where China was maybe five years ago. It’s a great, well-organized play on spectacularly cheap labor. It could undercut even China, and they’re very quickly following the model of development that you’ve already seen in the countries I’ve just mentioned. Having got their foothold by having the cheap labor move forwards to more advanced products.

RYSSDAL: Let me go to what might be the other end of that definition, if you want to spread it really wide, a country that I’ve been reading a little about as I researched our talk — Zimbabwe.

AUTHERS: That’s an intriguing one. Certainly plenty of people would not put that on the frontier yet. One of the things that has driven the emerging markets and which has helped countries like Brazil or Russia truly emerge, at least on some measures, is the huge booming commodity prices. If you’re a mineral-rich, or in other ways commodity-rich country in that band in southern Africa there are ways in which you could become a frontier market. Obviously you need to make some extremely careful decisions about the political system. There could be some very interesting bargains to be found there. You obviously have to do an awful lot of due diligence first.

RYSSDAL: Is this specifically stock investment, equity investment that we’re talking about here, or is it foreign direct investment, the buying of companies and capital assets?

AUTHERS: The level that’s attracting the most interest at the moment is what you’d call portfolio investing. Buying in stocks because obviously you’ve got this boom from hedge funds, that’s why it’s as high on the agenda as it is.

RYSSDAL: Are these frontier markets becoming more attractive because of what’s going on in some of the more developed economies like Wall Street and the American economy, with some uncertainties about the credit squeeze, and even some of the what you call now “emerged markets” of Brazil and India?

AUTHERS: That’s a big part of why the frontier markets are getting more popular. Another key thing we should mention is that money managers want markets that are not correlated to the places they’re already in so that they really get some diversification, some spreading of their risks by going there, and that’s not really what you get in Brazil for example anymore. Generally speaking Brazil is what you might call a geared play on the U.S. When the U.S. is up 2 percent Brazil is up 3. When it’s down 2 percent, Brazil is down 3. That doesn’t give you any great diversification benefit. Some of the frontier countries really have so much less exposure to the global economic factors, that you’ve got a real chance of finding something that will continue to rise even if the west goes into a slowdown.

RYSSDAL: John Authers is the investment editor at the Financial Times. Mr. Authers, thanks a lot for your time.

AUTHERS: Thank you.

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